oGBS( ) Example 3 - Currency Call Option

Description

Consider a European call option on the New Zealand Dollar which has a current exchange rate of 2.100 (expressed in USD/NZD) and a volatility of 25%. The (local) American risk-free interest rate is 6.0% while the (foreign) New Zealand risk-free rate is 7.5% (both expressed in actual/365 terms). The option has a strike price of 2.000 and matures on 1 October 2002. What is the value of this option as at 1 February 2002?

Function Specification

=oGBS(1, "1/2/02", "1/10/02", 2.100, 2.000, 0.25, 0.06, -0.015, 0)

Solution

The continuous equivalents of the actual/365 risk-free interest rate and the cost of carry are calculated as follows (see special cases):